Reverse Logistics Role in Securingthe Pharmaceutical Supply Chain

Bringing Value to the Manufacturer and Their Trading Partners

by Gerard Sartori

In the wake of all the news concerning pedigree programs, beginning with California, states are moving forward with legislation to mandate e-pedigree and/or the serialization of pharmaceuticals entering the supply chain within their borders. The mandate is that all prescription drug packaging, starting at the unit of sale level, must be marked with unique serial numbers, as well as an electronic pedigree which is created by the manufacturer, and then maintained and communicated throughout the supply chain to the retail level. With the California pedigree compliance program, which has been extended to January 1, 2011, it is apparent that there will be a requirement for the pedigree to follow the product as it is returned from the manufacturer's trading partners for credit.

Most of the attention to date has been placed on the forward logistics side of the process, starting with manufacturing, then distribution processes, moving the product toward the consumer. However, another important component of the supply chain, namely the reverse logistics piece, dealing with product recalls and trade returns, is a significant part of the equation.

Looking at the numbers

Healthcare Distribution Management Association (HDMA) estimates 3-4% of product going out from pharmaceutical warehouses ultimately comes back. Some redistributed, and some returned for disposition and destruction by a 3rd party processor or manufacturer.

Of the estimated 3-4% of product returned, it is also estimated that approximately 1 ½ -2% of pharmaceuticals manufactured will be returned for destruction with a resulting credit back to the manufacturers' trading partners.

Recent publications indicate that manufacturers currently spend up to 4% of cost of goods sold (COGS) on non-value-add distribution functions like returns and reverse logistics.

With such a large amount of product going through the reverse supply chain, returns should be an ideal touch point for mechanisms and technology to support a safer pharmaceutical supply chain. The following are some of the reasons supporting serialization/ePedigree, and how reverse logistics can play a role:

Brand Protection - Protecting the brand, and more importantly protecting the consumer, goes beyond serialization and electronic pedigrees. Over the last decade we have seen a rise in the incidence of counterfeiting and product diversion taking place in the US and global marketplaces. The World Health Organization (WHO) estimates that 10% of global pharmaceutical commerce involves counterfeit drugs. The annual earnings from the sale of counterfeit pharmaceutical products are estimated to be $32 billion.

Recent reports of counterfeit drugs and the subsequent warnings issued by pharma companies in the US signal a problem, with sporadic incidents being discovered at increasing frequency.

With the right technology and systems in place to monitor for counterfeit and/or diverted product, reverse logistics companies can perform a vital role in combating these threats to the supply chain. It is now commonplace to find that pharma manufacturers are discussing situations where they have experienced suspected counterfeiting and product diversion, and are exploring their options for mitigating the risk involved with these kinds of activities. Options that include authentication of product in the field and during the reverse distribution cycle of the supply chain.

A number of manufacturers have adopted multi-tiered technologies which will support a sound authentication program, such as the use of covert and/or overt tags, which can be applied to, or be a part of the packaging. Some examples are: 2D barcodes, Holograms, Color shifting Ink, Chemically reactive markers, Phosphors, Laser authentication and Molecular markers, among others that are provided by various companies in the track & trace industry. This would then provide an identifier for random or definitive sampling of returned product coming through the supply chain, both forward and reverse. Other proactive measures that have been taken are internet surveillance initiatives and field audit and authentication procedures. Field audits can be performed at various touch points such as distribution centers, pharmacies and other end-user sites in the supply chain.

The Internet has become one of the fastest growing channels for marketing and selling products to consumers. Unfortunately, because it affords anonymity, 3rd party delivery agents and speed of transaction, it is a ripe environment for criminals to sell counterfeit and diverted products into the market. Many healthcare products have been sold to US consumers via the Internet months before their approval and planned introduction. Consumers who buy healthcare products from the Internet are at a much higher risk of being duped or injured by this method of distribution because there are generally no intermediaries, such as doctors, pharmacists or approved distributors who actually see the product prior to the consumer using it. Regardless of the outcome, if it is negative, it is the brand that will remain top of mind after the incident.

Supply Chain Efficiencies - On the reverse logistics side, if the company performing the returns function on behalf of the manufacturer has adopted the right systems and technology to perform those tasks, there are a number of efficiencies that can be gained. First and foremost being the speed at which the provider can verify and process the return coming in on a daily basis. Maintaining an acceptable turn-a-round time from the time received to the scanning, processing and collecting of data necessary for the manufacturer to provide accurate and timely credit to their trading partners should be the goal. This is even more important when managing a product recall, when time and accuracy of reporting is most important. Timely processing will also help dramatically with the debit/credit reconciliation process which can pose major challenges to pharma manufacturers and their trading partners.

Keys to compliance, and bringing true value to the stakeholders can be accomplished by utilizing and adopting business practices and systems that help to facilitate quality outcomes. Some of which are:

Returns processors need to revamp or build out their IT capabilities to respond to ever-changing industry needs and trends, including the installation of RFID and 2D barcode readers on their processing lines. Operating returns systems can also facilitate an on-line Return Authorization (RA) feature, which gives the customer the option to request an RA on-line. This will then allow the system to automatically determine which products are eligible for credit, as well as the estimated credit value.

Streamlining of data to the manufacturer and their trading partners with the utilization of real-time data visibility through web-based management systems. From the RA request to receipt and processing of the returned items, all the way to disposition, the manufacturer will have access to data as it is generated during the returns process.

Providing access to the data and a suite of "Dashboard" management reports containing key trend and timeline comparisons can provide the manufacturer and their trading partners with valuable historical and current snapshots of product that is being returned.

Integration of QA Processes is also a critical success factor. Part of this should involve the joint development and maintaining of performance metrics between the service provider and their business partners. Building performance metrics into the service agreement should also be given consideration, with on-going measurement of results taking place on a quarterly or yearly basis. Specific to processing turnaround time, there is at least one returns company which has established a standard of a maximum of (5) days for turnaround time with their clients. A formal and comprehensive training curriculum is also a key element to quality outcomes.

Anyone involved with the receipt and processing of returned product should be fully trained on the aspects of customer procedures, equipment operation and materials handling. A system which supports multi-validated processing, or "double checking" the data which is captured should also be utilized.

Intelligent Redeployment

In summary, reverse logistics, once thought to be a very minor piece of the supply chain, has evolved to the point where these services, whether they are managed internally or outsourced to a professional returns company, are considered to be a significant part of managing product flow in the supply chain. For a good number of years, returns have been managed in a very mechanical and labor-intensive way, but with the adoption of the latest in technology, and more flexible operating systems, reverse logistics is taking on a whole new look - one that is adapting to the needs and changes that are taking place in the marketplace.

Gerard Sartori is the President of Qualanex, LLC. Based in the Chicago area, Qualanex specializes in the design, development, execution and management of technology driven reverse logistic management solutions for the pharmaceutical industry. Prior to launching Qualanex, Gerard was responsible for sales, client management services and business development for a number of other third party reverse logistic management companies. Throughout his twenty plus year career in the healthcare industry, Gerard has had a proven track record of driving significant customer value through the Supply Chain by working closely with several of the industry's leading pharmaceutical manufacturers to develop customized solutions to meet their specific reverse logistic needs and requirements.